Magazine article New Zealand Management

ECONOMICS: A Respectable Inflationary Debate

Magazine article New Zealand Management

ECONOMICS: A Respectable Inflationary Debate

Article excerpt

Byline: Bob Edlin

Business gave Labour leader Phil Goff a roasting last month after he told Federated Farmers that Labour now believed it was time to review the countrya[euro]s monetary policy. His party was, he said, looking beyond the narrow inflation-linked policy target and planned to take growth, productivity, and particularly the exchange rate, into account.

It wasna[euro]t quite like the Pope declaring an intent to take comfort from Protestantism but, since the Reserve Bank Acta[euro]s passage 20 years earlier, there has been a bipartisan consensus between National and Labour over policy targets and the primacy of price stability.

Goff was effectively announcing an end to the consensus because, he said, a[euro]Labour wants to see a step changea[euro] in the nationa[euro]s export performance. a[euro]We want policy that will keep our exchange rate as stable and competitive as possible. We want to reduce interest rates for businesses and homeowners, and put more money in the pockets of New Zealanders.a[euro]

Goff was sparse on detail, but suggested price stability and low inflation would remain important objectives for the Reserve Bank. The difference would come in the way management of monetary policy interacted with other objectives and would be an important part of Laboura[euro]s economic policy at the next election.

Prime Minister John Key countered that if Goff was suggesting a move away from a free floating exchange rate, he was a[euro]buying into a very interesting fighta[euro]. New Zealand, he pointed out, was a major importer of capital, had high levels of foreign debt and did not have the currency reserves to defend a fixed exchange rate.

Business New Zealand chief executive Phil Oa[euro]Reilly waded in, saying that destruction of the consensus would raise questions internationally about New Zealanda[euro]s financial stability. The high rate of the dollar was caused more by an unproductive economy, he said, and removing the Reserve Banka[euro]s inflation focus would result in policy trade-offs, giving the central bank the power to act as an alternative government.

The Employers and Manufacturers Association chief executive Alasdair Thompson was even more dismissive, accusing Goff of talking a[euro]gobbledegooka[euro] without providing any prescription for achieving conflicting outcomes.

The International Monetary Fund has been a powerful champion of the inflation management orthodoxy. …

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